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Educate me: The tumble of oil

tkuder007

tkuder007

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Sep 5, 2005
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So I'm reading that oil is reaching crisis level lows, but not sure I see the whole picture here. Someone fill me in (SPG?) on why tumbling oil prices is such a bad thing...

Here's what I (think I) know:

1) I'm largely a top-line guy within a CPG/On-site arm of a sizable US company. I see all this OPEX favorability (due to lower freight, among other things) that allows us to invest a little more in marketing, trade, R&D, people, etc. It's been a big part of some good tailwinds we've experienced that i would file away under the umbrella of temporary external factors - and i would consider it a very good thing in this context

2) i get that US energy companies are probably hurting as a result of falling prices, but eff those guys. they're huge price gougers and their value chain has been so ridiculously upside down for years (in a way that benefits them), so i dont feel bad for them in the least. if they arent hedged for this type of thing, that's on them

3) this has to hurt regimes in the ME and groups like ISIS that rely on oil revenue to support their nation/faction/etc... again, not the worst thing from my perspective

So... what am i missing?
 
dropping the price to kill the shale industry?
 
adp98 said:
dropping the price to kill the shale industry?
Click to expand...

yeah, based on my above "what i know" list, i need some further explanation on what that means, how far it reaches, and why someone outside of that industry should care.

I'm not doubting that it's important, i just dont know anything about it. its not my world. i only understand 2 commodities with any level of depth --- coffee and dairy. very different from oil
 
hey man, i'm trying to learn here, i dont need your rstrick-like distractions from the matter at hand.

tell me about shale, and how its demise in the near term impacts me now, as well as 10 yrs from now. If OPEC takes a bite out of shale now, does it rebound in the future, or is it a potential death blow?
 
tkuder007 said:
hey man, i'm trying to learn here, i dont need your rstrick-like distractions from the matter at hand.

tell me about shale, and how its demise in the near term impacts me now, as well as 10 yrs from now. If OPEC takes a bite out of shale now, does it rebound in the future, or is it a potential death blow?
Click to expand...
The shale fracking industry has been a big boon to our economy. Our "friends" @ OPEC recognize it as the biggest threat to their oil monopoly. It's a power play to try to kill our domestic fracking which is a more expensive process to produce the same amount of fuel. The additional problem of falling oil prices is that it trickles through other parts of our economy..........demand for associated products like heavy equipment. It will also cause a loss of jobs in what was an improving job situation in the country. If our fracking industry starts to shut down its facilities it's very expensive to start up again.
 
tjc3844 said:
The additional problem of falling oil prices is that it trickles through other parts of our economy..........demand for associated products like heavy equipment. It will also cause a loss of jobs in what was an improving job situation in the country.
Click to expand...

Would like to see this explained more throughly. Seems like less money spent on oil = more money spent on everything else. Despite the miniscule impact of a presumed drop in fracking gear.
 
NickleDimer said:
Would like to see this explained more throughly. Seems like less money spent on oil = more money spent on everything else. Despite the miniscule impact of a presumed drop in fracking gear.
Click to expand...

this is precisely what i have seen in my world. more to spend on expansion = more jobs internally and at vendors.
feels to me that on the whole, it wouldn't be the worst thing in the world to pause on shale and burn through as much of the OPEC supply as possible while they leave it cheap. ride it out, get something cheap that is usually expensive. put more money in the pockets of the american consumer. maybe give us an opportunity to MAKE something here

cheap oil presents a boon to every industry we have that requires energy or transportation, except the producers themselves. and that cost savings will likely be applied elsewhere. if ONE industry here suffers, well, that's just how it goes in a free market economy.

i'd rather hit those guys (OPEC) in the wallet now, and sit on our reserves for later. seems prudent to be honest. if the economies of south dakota suffer in the meantime, well, find something else to do. it's just one part of our economy, and it seems like it presents more winners than losers.
 
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But what if you can't turn those economies back on? If I"m betting on who can ride out the pricing issues it's those who have been gouging for a long, long time. That would be my fear. Note, I'm don't know a lot about the subject and don't proclaim to be smart on this issue. Book mark that post to demonstrate I can admit I don't know everything.
 
adp98 said:
But what if you can't turn those economies back on? If I"m betting on who can ride out the pricing issues it's those who have been gouging for a long, long time. That would be my fear. Note, I'm don't know a lot about the subject and don't proclaim to be smart on this issue. Book mark that post to demonstrate I can admit I don't know everything.
Click to expand...

if the financial incentive is there, i would bet on us being able to turn it back on. amazing what people can accomplish when that carrot is there... especially in this country

but it goes to a different issue... industries face external pressures all the time, some to the point of being an existential threat (look at textiles in the US). if a crisis in one industry presents hugely offsetting benefits in other domestic industries, isnt that good on the whole? isnt it all part of a free market economy? are we all crying for the paper industry as digital has put an enormous dent in demand? should we cry for video rental outfits as streaming makes them irrelevant? i say no. just like i dont give a shit if a bunch of frackers lose their jobs. they wont care if my industry goes to hell and i have to find something else. its part of the game, right?
 
tkuder007 said:
if the financial incentive is there, i would bet on us being able to turn it back on. amazing what people can accomplish when that carrot is there... especially in this country

but it goes to a different issue... industries face external pressures all the time, some to the point of being an existential threat (look at textiles in the US). if a crisis in one industry presents hugely offsetting benefits in other domestic industries, isnt that good on the whole? isnt it all part of a free market economy? are we all crying for the paper industry as digital has put an enormous dent in demand? should we cry for video rental outfits as streaming makes them irrelevant? i say no. just like i dont give a shit if a bunch of frackers lose their jobs. they wont care if my industry goes to hell and i have to find something else. its part of the game, right?
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I don't trust our Gov to provide a carrot and regulatory uncertainly and obstacles in the name of climate creates significant disincentive. Lastly, I just don't trust OPEC. They continue to over produce at a time the US is exploring and developing additional domestic capacity? I just don't trust them. I say keep purchasing and stockpiling but do so with eyes wide open. These guys are playing the long game because their entire economy is built on it. Lastly, we don't really operate in a free market when it comes to energy. Right now Congress is tied up over how many tens of billions in taxbreaks for solar and other forms of energy to provide before leaving for the holidays.
 
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tkuder007 said:
if the financial incentive is there, i would bet on us being able to turn it back on. amazing what people can accomplish when that carrot is there... especially in this country

but it goes to a different issue... industries face external pressures all the time, some to the point of being an existential threat (look at textiles in the US). if a crisis in one industry presents hugely offsetting benefits in other domestic industries, isnt that good on the whole? isnt it all part of a free market economy? are we all crying for the paper industry as digital has put an enormous dent in demand? should we cry for video rental outfits as streaming makes them irrelevant? i say no. just like i dont give a shit if a bunch of frackers lose their jobs. they wont care if my industry goes to hell and i have to find something else. its part of the game, right?
Click to expand...

This is a crossover to the "things that frighten elderly people" thread. I once had a conversation with an older woman about EZ Pass lanes. Naturally, she did not like the idea of the EZ Pass lanes for several reasons. One of them included the loss of jobs for the toll takers. Seriously clark? In reality, the toll booth attendant probably doesn't even really require a high school degree. Why should we care about such a menial union job that gets outrageous pay, benefits, retirement etc.? I don't like seeing people lose their job, but if they are a toll taker, tough beans, those jobs are inconsequential.
 
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adp98 said:
I don't trust our Gov to provide a carrot and regulatory uncertainly and obstacles in the name of climate creates significant disincentive. Lastly, I just don't trust OPEC. They continue to over produce at a time the US is exploring and developing additional domestic capacity? I just don't trust them. I say keep purchasing and stockpiling but do so with eyes wide open. These guys are playing the long game because their entire economy is built on it. Lastly, we don't really operate in a free market when it comes to energy. Right now Congress is tied up over how many tens of billions in taxbreaks for solar and other forms of energy to provide before leaving for the holidays.
Click to expand...

i dont trust our government or opec either but with your "long game" comment it seems like you're giving them the benefit of the doubt that they're doing it "right" combined with some level of sentiment that we are not. our federal govt sucks, but im pretty sure theirs is as bad or worse. at least we have diversified assets & resources here

of course they're trying to play a long game given their dependence on oil to fund everything they do, but that doesnt mean its going to work out for them. they might put a dent in our shale, but they're also likely leaving money on the table running the rates so low. do we export a lot of shale? or are they just trying to impact energy consumption within the US market? i dont know the answer to these things, but i know that i'd rather leave our resources as intact as possible while they fire-sale now, in the case shit goes down to the point where we cant get ANYTHING out of that region anymore.

your last point is interesting too, because i think at some point humanity finds a solution that significantly decreases global demand for fossil fuels. when that day comes, their long game goes right down the toilet. maybe this is a desperate effort to discourage the type of scientific advancement that brings that day to us more quickly. i dont know. my guess is that these guys are more likely to be behind the curve than the rest of the developed world. maybe i'm being naive here, but i dont lean towards the assumption that these guys know what they're doing and that this move is devastating for us down the line. they still need us more than we need them, and the more supply we keep intact, the more i'd imagine that relationship solidifies.

lots of "i dont knows" in here, which is why i started the thread. but i like that in the short term, this movement helps our economy in most sectors.
 
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tkuder007 said:
i dont trust our government or opec either but with your "long game" comment it seems like you're giving them the benefit of the doubt that they're doing it "right" combined with some level of sentiment that we are not. our federal govt sucks, but im pretty sure theirs is as bad or worse. at least we have diversified assets & resources here

of course they're trying to play a long game given their dependence on oil to fund everything they do, but that doesnt mean its going to work out for them. they might put a dent in our shale, but they're also likely leaving money on the table running the rates so low. do we export a lot of shale? or are they just trying to impact energy consumption within the US market? i dont know the answer to these things, but i know that i'd rather leave our resources as intact as possible while they fire-sale now, in the case shit goes down to the point where we cant get ANYTHING out of that region anymore.

your last point is interesting too, because i think at some point humanity finds a solution that significantly decreases global demand for fossil fuels. when that day comes, their long game goes right down the toilet. maybe this is a desperate effort to discourage the type of scientific advancement that brings that day to us more quickly. i dont know. my guess is that these guys are more likely to be behind the curve than the rest of the developed world. maybe i'm being naive here, but i dont lean towards the assumption that these guys know what they're doing and that this move is devastating for us down the line. they still need us more than we need them, and the more supply we keep intact, the more i'd imagine that relationship solidifies.

lots of "i dont knows" in here, which is why i started the thread. but i like that in the short term, this movement helps our economy in most sectors.
Click to expand...
The commodities portion of the worldwide economy is already in recession and it has spilled over into manufacturing which is a significant development. Deflation is a much more serious and hard to correct trend.
tkuder007 said:
i dont trust our government or opec either but with your "long game" comment it seems like you're giving them the benefit of the doubt that they're doing it "right" combined with some level of sentiment that we are not. our federal govt sucks, but im pretty sure theirs is as bad or worse. at least we have diversified assets & resources here

of course they're trying to play a long game given their dependence on oil to fund everything they do, but that doesnt mean its going to work out for them. they might put a dent in our shale, but they're also likely leaving money on the table running the rates so low. do we export a lot of shale? or are they just trying to impact energy consumption within the US market? i dont know the answer to these things, but i know that i'd rather leave our resources as intact as possible while they fire-sale now, in the case shit goes down to the point where we cant get ANYTHING out of that region anymore.

your last point is interesting too, because i think at some point humanity finds a solution that significantly decreases global demand for fossil fuels. when that day comes, their long game goes right down the toilet. maybe this is a desperate effort to discourage the type of scientific advancement that brings that day to us more quickly. i dont know. my guess is that these guys are more likely to be behind the curve than the rest of the developed world. maybe i'm being naive here, but i dont lean towards the assumption that these guys know what they're doing and that this move is devastating for us down the line. they still need us more than we need them, and the more supply we keep intact, the more i'd imagine that relationship solidifies.

lots of "i dont knows" in here, which is why i started the thread. but i like that in the short term, this movement helps our economy in most sectors.
Click to expand...
The worldwide commodity sector is already in recession. That could signal the start of a deflationary trend. Deflation is much harder to turn around than inflation. That's why the Fed will raise interest rates this week. But, that rate increase could cause the collapse of several large heavily leveraged bond hedge funds like 5th Street which has an 11% coupon. If that happens all bets are off and there might very well be another stock market plunge.
 
tjc - those deflation risks sound like the problem of the bond hedge funds in question, and how they've managed risk. rates are at historic lows... if coming off those lows sinks a bond fund or two, isnt that on them? do they expect rates to stay at historic lows forever?

is that our problem? maybe the market needs a correction? and doesnt cheap energy have a big enough impact on corporate earnings that the market could survive, based on real performance vs financial maneuvering?

again, i'm a bit over my skis on some of these macro issues, but you seem driven by fear of on paper transactions and how they settle out, vs real economic and household factors.
 
I've been on this website since the day it started and I never thought I would say this but here goes... I largely agree with TJC....

The challenge right now with collapsing oil prices is the impact it has on our economy. Most people say, who cares what happens to Texas oil barrons or those crazy people in North Dakota, but I don't think everyone realizes how pervasive the impact of high oil prices has had in our economy beyond just the actual work in the oil fields. Almost EVERY impact of our economy has been positively affected by the "shale boom". Let's take a company that makes gears in Detroit. Those gears historically have gone into heavy equipment (diesel engines, etc.). Well over the last years, 30% of their business has shifted to oil - now that's going away. Let's take Ford and their F-150's. Every single oil well guy in texas drives an F-150 or a Silverado. Those people lose their jobs.

More importantly, let's look at the HY bond market. Oil prices collapse, HY bond funds collapse and investors are less likely to invest in other HY bonds because their is a net outflow of cash given the collapse of a portion of the market. That means other areas of the economy don't have as much access to grow.

Now the flip side of it is, the American Consumer should have more money in their pocket to spend. If consumer confidence remains high, then it can off-set the impact of lost jobs associated with the oil patch. Maybe F150's sell more in Chicago because people have more money to spend - or maybe not.

However, it is definitely the Saudi's who are keeping price low. I actually don't think they're punishing us or trying to keep Fracking down. The reality is that we have oil, we have gas, we have a lot of it. The US can produce a sh*t of oil and gas and those markets can bounce back. I think the Saudi's are actually more interested in punishing others than the US (it just has the impact of punishing the US as well). As soon as oil bounces back, this US oil economy starts to rebound
 
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TwoDecks said:
I've been on this website since the day it started and I never thought I would say this but here goes... I largely agree with TJC....

The challenge right now with collapsing oil prices is the impact it has on our economy. Most people say, who cares what happens to Texas oil barrons or those crazy people in North Dakota, but I don't think everyone realizes how pervasive the impact of high oil prices has had in our economy beyond just the actual work in the oil fields. Almost EVERY impact of our economy has been positively affected by the "shale boom". Let's take a company that makes gears in Detroit. Those gears historically have gone into heavy equipment (diesel engines, etc.). Well over the last years, 30% of their business has shifted to oil - now that's going away. Let's take Ford and their F-150's. Every single oil well guy in texas drives an F-150 or a Silverado. Those people lose their jobs.

More importantly, let's look at the HY bond market. Oil prices collapse, HY bond funds collapse and investors are less likely to invest in other HY bonds because their is a net outflow of cash given the collapse of a portion of the market. That means other areas of the economy don't have as much access to grow.

Now the flip side of it is, the American Consumer should have more money in their pocket to spend. If consumer confidence remains high, then it can off-set the impact of lost jobs associated with the oil patch. Maybe F150's sell more in Chicago because people have more money to spend - or maybe not.

However, it is definitely the Saudi's who are keeping price low. I actually don't think they're punishing us or trying to keep Fracking down. The reality is that we have oil, we have gas, we have a lot of it. The US can produce a sh*t of oil and gas and those markets can bounce back. I think the Saudi's are actually more interested in punishing others than the US (it just has the impact of punishing the US as well). As soon as oil bounces back, this US oil economy starts to rebound
Click to expand...
The Detroit gear company is, I believe, a bit of a red herring. The downside from that is still almost certainly a fraction of the upside to increased consumer spending power.
The hit to the HY bond market is an interesting concept. Much of the deflation concern has centered around productivity driven deflation, which generally isn't that great of a concern. Monetary driven deflation would present a real problem, but how likely is it, really? Is that money really going to get so spooked that it all sits on the sidelines? Or are the going to take their lumps and refocus on the remaining 83% of the junk bond market, maybe also putting a bit more in hedge funds not exposed to energy section risk instead?
My bet is that the economy moves into recession in 2016, but that we don't see a major negative impact or monetary deflation from oil staying relatively cheap. The again I'm a lawyer so what the Hell do I know? Not much.
 
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TwoDecks said:
I've been on this website since the day it started and I never thought I would say this but here goes... I largely agree with TJC....

The challenge right now with collapsing oil prices is the impact it has on our economy. Most people say, who cares what happens to Texas oil barrons or those crazy people in North Dakota, but I don't think everyone realizes how pervasive the impact of high oil prices has had in our economy beyond just the actual work in the oil fields. Almost EVERY impact of our economy has been positively affected by the "shale boom". Let's take a company that makes gears in Detroit. Those gears historically have gone into heavy equipment (diesel engines, etc.). Well over the last years, 30% of their business has shifted to oil - now that's going away. Let's take Ford and their F-150's. Every single oil well guy in texas drives an F-150 or a Silverado. Those people lose their jobs.

More importantly, let's look at the HY bond market. Oil prices collapse, HY bond funds collapse and investors are less likely to invest in other HY bonds because their is a net outflow of cash given the collapse of a portion of the market. That means other areas of the economy don't have as much access to grow.

Now the flip side of it is, the American Consumer should have more money in their pocket to spend. If consumer confidence remains high, then it can off-set the impact of lost jobs associated with the oil patch. Maybe F150's sell more in Chicago because people have more money to spend - or maybe not.

However, it is definitely the Saudi's who are keeping price low. I actually don't think they're punishing us or trying to keep Fracking down. The reality is that we have oil, we have gas, we have a lot of it. The US can produce a sh*t of oil and gas and those markets can bounce back. I think the Saudi's are actually more interested in punishing others than the US (it just has the impact of punishing the US as well). As soon as oil bounces back, this US oil economy starts to rebound
Click to expand...

TD, we've always counted on the consumer to bail out the economy but this time could be different. Real wages have not increased in some time and consumers, especially millennials, are drowning in debt. The collapse of some HY bond funds could be just the trigger that could send stocks tumbling, cause leveraged businesses to fail and create an economic crisis very much like we had in 2009 if not worse. It's a pretty shaky economic picture out there right now. (Btw, I guess it just took you a while to recognize my wisdom :p )
 
Ohh the irony ...I harken back to the 2008 election and the battle cry was drill baby drill and how increasing domestic oil production was the way to beat Arabs at their game and bring them to their knees..conventional wisdom was Obama didn't have the balls to direct an energy program that would lessen our dependence on the middle east..so now we find ourselves at this junction <maybe lucky maybe not> and we have no idea if its good or bad.....just a question but how does the Keystone pipeline play into all this oil glut talk? Just trying to follow the rational in it all.
 
catFANatic80 said:
Ohh the irony ...I harken back to the 2008 election and the battle cry was drill baby drill and how increasing domestic oil production was the way to beat Arabs at their game and bring them to their knees..conventional wisdom was Obama didn't have the balls to direct an energy program that would lessen our dependence on the middle east..so now we find ourselves at this junction <maybe lucky maybe not> and we have no idea if its good or bad.....just a question but how does the Keystone pipeline play into all this oil glut talk? Just trying to follow the rational in it all.
Click to expand...

The fracking industry developed despite government policy. It's a great example of the free market at work. This administration has taken millions of acres off the market for exploration and development of fossil fuel energy. The Keystone pipeline would have created some very good paying jobs and would have helped the economies of the towns and cities adjacent to it. We'll have a Keystone pipeline after BO leaves office.
 
Its official: the junk bond market is about to go bad.

But in the kangaroo's opinion, that has more to do with laughable interest rates and the record setting amount of risky bonds issued in the past half decade. There are going to be/already have been some defaults in oil and gas, but I feel like defaults are going to happen in a lot of sectors. And I also feel like loose monetary policy will be the cause of a lot of those defaults.

I think it should also be noted that there is a difference between high oil prices and sustainable oil prices. There aren't many O&G companies that can turn a profit when oil prices are in the $30-$50 range. But we don't need prices to be $150 for the american O&G market to thrive either. I don't think it is a binary choice between $4/gallon gas and 10% unemployment in north dakota. it can be somewhere in between.
 
Another thing about O&G and employment:

On the benchwarmers, we like to scold liberal artists and kids that go to marginal schools and get marginal degrees. I can only speak for Western PA, but for a lot of people graduating high school or in their 20's and 30's, shale was a gr8 way to earn a livable wage without a fancy degree. I have cousins, acquaintances, etc. that had high paying, albeit stressful, jobs at a young age and a lousy education. It isn't easy for a bunch of CoDBers wearing their allen edmonds shoes to appreciate this, but for the world outside the NE Corridor, those jobs are important.
 
tjc3844 said:
We'll have a Keystone pipeline after BO leaves office.
Click to expand...

Do you really think Bernie is going to flip on this issue?...it actually was meant to be a serious question...With oil prices bottoming out is Keystone even relevant now? would the oil industry fund it anymore?
 
KennyTheKangaroo said:
Another thing about O&G and employment:

On the benchwarmers, we like to scold liberal artists and kids that go to marginal schools and get marginal degrees. I can only speak for Western PA, but for a lot of people graduating high school or in their 20's and 30's, shale was a gr8 way to earn a livable wage without a fancy degree.
Click to expand...

And if the shale boom didn't happen, would they just curl up and die? No, they would just go wherever they could find jobs - the free market. South Dakota isn't booming on the natural gas extracting skillz of locals. It's a transient population. Plenty of people moved south when manufacturing chased cheaper labor down there.
 
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I sat in on a presentation from a commodity focus mutual fund recently. They provided a chart of 22 commodities and 16 are currently under the cost of production. The strong dollar (commodities are priced in USD) and decreased demand from China were two factors that I recall. Their pitch was to invest in commodities as this phenomenon will correct which they substantiated with a second chart.

These are strange times as for many years the equity market was negatively correlated to oil whereas the opposite is true today. Also, the US is no longer dependent on OPEC. Spreads have opened between West Texas Intermediate and Brent due to fracking and other technological development. Personally I think fracking will serve as a "ceiling" for oil prices. If the price goes below a certain point they stop fracking and resume once the price goes back up. I believe the technology is such that they can quickly come back to market.

Another factor is that Iranian oil will come back onto the market. Oil dependent countries such as Russia will continue to have problems.
 
KennyTheKangaroo said:
Another thing about O&G and employment:

On the benchwarmers, we like to scold liberal artists and kids that go to marginal schools and get marginal degrees. I can only speak for Western PA, but for a lot of people graduating high school or in their 20's and 30's, shale was a gr8 way to earn a livable wage without a fancy degree. I have cousins, acquaintances, etc. that had high paying, albeit stressful, jobs at a young age and a lousy education. It isn't easy for a bunch of CoDBers wearing their allen edmonds shoes to appreciate this, but for the world outside the NE Corridor, those jobs are important.
Click to expand...
I actually agree with this. Believe it or not, most people in this country don't graduate from college. Making sure their lives are better is one of the most important things to making sure we have a strong economy. Something that doesn't affect CoDBers, like fuel prices, gives our economy an instant kick because these people have an extra $40 per month.
 
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